Lean Startups

I am taking a quick creative break from editing The Lean Entrepreneur, and as I poke my head into my Twitter stream, I invariably come across tweets drawing an equivalency between the Apple Maps debacle and the concept of Minimum Viable Products.

This is a mistake, one that demonstrates misunderstanding of the term.

A Minimum Viable Product is a triad. It is composed of:

The hypothesis/objective you are trying to learn

from the target market segment you are trying to learn about

and the form it takes to achieve that learning

These three have to align to be useful. Otherwise, you are simply “throwing shit against the wall.”

It cannot be belabored: the purpose is to learn some unknown specific thing from some specific group. This is because you have no reliable data about your objective, hence, you are creating experiments to “manufacture” the relevant data.

If you do have good data about the triad I listed above, then you shouldn’t be building MVPs. You should be building stuff that your market segments demands.

It should be clear that Apple has petabytes of data about how, why and who used Google Maps on the iPhone.

Pulling a good product for strategic reasons, and substituting it with a painfully, substandard product does not a Minimum Viable Product make. This is simply poor and sloppy execution of sustaining innovation. Tim Cook has admitted as much, while Apple apologists have been providing covering fire with their convoluted “Apple is playing 17 dimensional chess on all of us and we cannot begin to comprehend their brilliant strategy” arguments.

Yeah, right. Meanwhile, people, like me, who like Apple products, are’t super-thrilled about using a device that become less useful, in my case, overnight. Again, that is not an MVP, so don’t confused the two.

Here’s hoping my iPhone regains some its recently lost utility very quickly.

“We aren’t losing deals to other VCs, we are losing deals to startups that continue to bootstrap.”

-anonymous venture capitalist lamenting the state of affairs to me

We’re now long into a new startup reality. One that will be characterized by constant change. The rules of the game are changing, the disruptors themselves are being disrupted, and tactics that worked a few years ago are now nothing but useless cruft.

In future posts I will get into what I think is really happening in terms of startups and innovation from a 1 million foot-level, but for now, I am interested in expounding upon is how the confluence of the factors listed above is shifting the balance of power between entrepreneurs and investors, while still favoring the moneymen and money-women, to more and more to the side of the entrepreneurs.

The great investors already grok this — the not so-great are about to be a whole helluva lot pain as they attempt to remain relevant in order to get a seat at the Good Deals table.

Simply put, in the new startup reality, today’s savvier entrepreneurs, with more flexibility in financing (Kickstarter anyone?), are no longer assuming investors’ value-add (sans money) – but are actively verifying that a value-add exists and making sure that they get investors who add considerable non-monetary value or pressing investors who don’t, to provide better financing terms. And in some cases, intentionally pursuing “dumb money”.

To recap, a non-exhaustive, and non-mutually exclusive, list of how an investor can add value (ostensibly) to your startup:

Their Network

You want this investor to invest in you because their network is relevant to your startup. Not only is it high-quality and far-reaching, it goes beyond simple introductions because they possess a singular ability to make people in that network actually do their bidding…for you. <—- Read this again. And again. This is rare.

While many investors claim this – very, very few actually can deliver on this promise. Today’s entrepreneurs, unfunded and funded alike, are comparing notes on these claims. Does Jane McVentureCapitalist get her calls or emails returned? Can she force, cajole or beseech people to do her bidding on your behalf?

(Inversely, such investors see a natural fit to leverage and hedge their investment in you and your startup vis-à-vis their network.)

The Signaling Effects

This investor is a high-quality brand-name. You should trade on their name for the high-value signaling effects it provides. Broadcasting that you are funded by such an investor makes it radically easier to hire top talent, to create a perception of stability and fait accompli success, to make deals with potential partners, to get the attention of the press easily, and to sell your startup, amongst other things. It should be readily apparent to you who these investors are and who they aren’t.

Note: these brand names used to be the name of the actual VC firm, but now the brand value appears to be accruing to the actual partner. This is not trivial. See if you can suss out what that implies for your startup and for the other partners (perhaps those who don’t have a brand name) in the firm.

Pattern-Matching & Specific Domain/Phase

A particular investor has both deep and broad experience in the same space you are attempting to disrupt. Similarly, you are in or will be in a specific phase of company building that an investor has an unusual talent for – be it starting out or scaling hyper-growth or the sale of your startup.

(Recent) Startup operational experience

This investor has been around the block once or twice in a startup, they know your pain, your dreams and your reality better than you know it yourself. They’ve shed copious amounts of blood, sweat and tears to get across the finish line.

This is tricky — while many investors will claim both a) relevant operational experience and b) willingness to fight in the trenches with you — not many actually possess both. Also, this may swing the other way, you don’t actually want their hand on your steering wheel.

On the other hand, this is one that is relatively easy to verify via your entrepreneur back-channels.

Everything to Everyone

Watch out for this category. What is their value-add? Warning sign: they have discomfort verbalizing it and aren’t used to being asked about it. They’ll say it’s a little bit of everything. I don’t buy it, and neither do today’s savvy entrepreneurs.

Savvy entrepreneurs would rather take money from so-called “dumb money” that, at least: Stays the f*ck out of your way.

My sense is that great investors know precisely where and when they actually add value and also know how to stay out of your way, and not impede you with wind-bag advice and onerous ceremony and status re-enforcing ritual. “Dumb money” that knows it is dumb money isn’t so dumb in my book.

Summa summarum, based on my conversations with entrepreneurs and early employees, who have exited, whose startups are still in play, some funded and some not-funded —- they firmly believe that, in some cases, it is advisable to take “dumb money”, on good terms, that provides more value-add by staying out of their way and not pretending to be everything to everyone than it is to take money from the middle-tier folks who destroy value and waste your time by not delivering on their value-add promises.

It is the middle-tier investor class that may prove most dangerous, fickle and least valuable to your startup. They like to pretend they bring to the table an exploitable network, strong signaling, domain expertise, and operational experience – but rarely do – and by fooling you, they actually destroy value by wasting your time and sapping your creativity.

Today, the 500 Startups Mentor thread has had some very interesting back and forth about how to mentor startups and more importantly, how to measure mentor quality and advice. While I cannot share the previous thoughts on the thread, I can share my two cents:

A lot of thoughtful comments on the topic of mentoring — allow me to throw something into the mix:

I wonder how much of our advice is actually iatrogenic in nature. How often have we done our best to give what we thought was pure contextual gold, the hapless patie—- I mean, startup founder,
followed it to the letter and they became measurably worse off because it? Like a doctor accidentally prescribing the wrong medicine, we, unintentionally but well-meaningly, have caused damage or injury.

The concept of iatrogenesis for startup founders isn’t ever discussed in startup-land, but should be.

If you want to extend this line of thinking — how do startup incubators/accelerators measure & prevent “nosocomial infections” between startups? In other words, how does one identify and prevent bad habits/practices from spreading amongst startups within the confines of an investment vehicle?

In the past, I have suggested to Bjorn and Max from Startup Genome think about this for their purposes. Someone pleaserun with this.

TL;DR: Brant Cooper & I have a new book coming soon. Go buy The Lean Entrepreneur AppSumo Bundle while you can. It is 96% off, has a bunch of apps + pre-order of The Lean Entrepreneur.

Surf The Wave Art by @FAKEGRIMLOCK for The LeanEntrepreneur.co

It has been too long since I last blogged. This blog post will update you as to what Brant Cooper and I have been up to for the last few months, namely: finishing our new book, The Lean Entrepreneur.

We’re excited about The Lean Entrepreneur. It is a wholly new book that takes what we wrote about in The Entrepreneur’s Guide to Customer Development to another level, demonstrates the application of Lean Startup-like thinking in anywhere one desires innovation: social entrepreneurship, automotive manufacturing (ironic, right?), tech startups, music and artist development, and finance and investing, to name a few.

All of that, in it and of itself, is deeply interesting. But what we are most excited to cover in the book is the context and landscape of Lean Startup thinking.

Many a time, Brant and I have asked ourselves, “Why Lean Startup now? Why not 10 years ago? Or even 50 years ago?” The answers to those questions are explained by the coming social, economic and cultural sea changes we are rushing into headlong…whether we like it or not.

Think of yourself sitting on surfboard a hundred yards offshore, and a set of massive waves are visible on the horizon as they build towards the shore.

These waves are powered by the mobile internet and mobile devices, by the read/write digital fabrication technologies such as 3D scanning/3D printing, by “cultural technologies” such as crowdfunding, crowdsourcing and of course, by *Lean Startup-like methods themselves.

Currently mid-2012, we have only begun to feel the power of these disruptive waves. And when they start to converge upon the shore, suffice to say, we will be living in interesting times.

In the Lean Entrepreneur, we interview amazing entrepreneurs who are living in this future, and are kind enough to report back to us.

But back to the you on your surfboard – you have two choices:

1) You can paddle back to shore and build a fortification to protect yourself. (Think music labels in the last +10 years or so)

2) You can swallow hard, paddle farther outside (ie away from shore) and position your board and yourself to surf. (Think Lean Entrepreneurs)

If you choose 1) — you will be obliterated and washed away. Maybe not immediately, but certainly very soon. And when you do, it will be ugly; kicking and screaming the whole way.

Let me give you a contemporary example:

Entrepreneurial education (and education as we now know it) has just begun to feel the cold spray of this wave, and entrenched stakeholders aren’t happy about it. Direct competition like MIT OCW, New.edu, Udacity, Udemy and other learning platforms are going to displace traditional education. Moreover, hackathons like Lean Startup Machine and Startup Weekend are also disrupting entrepreneurial education. As are incubators — incubators aren’t just at the bottom of the investment ladder but also they are the top of the education ladder. Why go into debt for MBA, when someone will pay you to take a crack at a startup?.

Online learning platforms, hackathons, incubators are all initiatives that are surfing these waves, ie they have chosen 2). Now, listen for the unsheathing of the knives as those (eg student-debt-financial-industrial complex, tenured faculty, textbook publishers etc etc) in their fortifications find themselves about to be washed away.

Personally, I am very bullish about the prospects of unlocking human capital and creativity globally vis-a-vis this sort of disruption in education. This will make the world a better place, but the transition to this will be painful.

Now back to you: WHO are you? Where are you relative to these coming waves? Are you paddling out into deeper waters? Or are you scrambling to get to shore?

More on this later….

BUT TODAY you should get go buy The Lean Entrepreneur AppSumo Bundle while you can. It is 96% off, has a bunch of apps + pre-order of The Lean Entrepreneur.

1) If you’re in the Los Angeles area, come by the next LeanLA meetup and see Jason Calacanis interview Eric Ries. All attendees also get a copy of the The Lean Startup. You should RSVP ASAP.

2) I wrote an article that kind people at Harvard Business Review blog deemed fit enough to publish. My takeaway — it doesn’t really matter where your “vision” comes from (divine inspiration or customer feedback) — but you probably should check it against reality. Henry Ford’s steadfast adherence vision to his vision served him well initially, when he found “Product-Market Fit” with the Model T, but when the markets changed, his vision no longer resembled reality. Read the whole thing on HBR. (Thanks to Brant Cooper, Eric Ries, Ben Yoskovitz, Sean Murphy & Steve Cheney for reading drafts and giving me their thoughts. Much appreciated.)

In the context of startups, a False Negative means that while your startup is not getting any traction or love with the market, investors and talent and doesn’t appear to be inching close to Product-Market Fit —– there is a high probability that it is actually a really, really super-duper idea and you could exit for $100m in 3 years. You don’t want to give up because you, in your heart of hearts, know this — even though no one else believes it. The fear of the False Negative is giving up too early and letting a good idea die or worse yet, seeing someone else take it and blow it up in a big way. IMO this is a very legitimate fear.

Cole Sear: I see dead startups.Malcolm Crowe: On TechCrunch?
[Cole shakes his head no]Malcolm Crowe: At Coupa Cafe?
[Cole nods]Malcolm Crowe: Dead startups like, in books about startups? In textbooks?Cole Sear: Operating like regular startups. They don’t see each other. They only see what they want to see. They don’t know they’re dead.Malcolm Crowe: How often do you see them?Cole Sear: All the time. They’re everywhere.

Remember, neither Malcolm Crowe nor the audience know Malcolm is actually dead until the end of the movie. And that is the danger of the False Positive; the high probability that your idea really doesn’t have any merit but you limp along and persevere because you a) ignore or eschew relevant negative feedback b) listen to false prophets that look and feel like progress but are anything but —- all the while, hoping for a positive Black Swan to stumble over. And then when your money runs out, it all comes back to you, in a scary montage, about how you had ignored all the creepy signs of being dead.

Every startup founder has to ask oneself is: How do I avoid them? Which is more likely? The probability of a False Positive or that of a False Negative? They’re both real fears — but which is materially worse?

As always, there are no easy answers to questions like these.

However, you might guess that I (and Dave btw) think that the False Positive is orders of magnitude more likely, more insidious and more evil — and that one reason why Customer Development and Lean Startups make sense to me.

The value is outrageous. Essentially, $6,000. worth of startup goodies for a measly $99. (I know that some of you out there spend more than that on gourmet coffee at places like Epicenter Cafe, Blue Bottle, Intelligentsia in a week. (I know I do.) Go check it out.

This is even better. If you buy The Lean Startup Bundle and then write a blog post about why your startup is “Lean” you could +$130,000 worth of investment, schwag and mentoring.

► $70,000 from “500 Startups” (Full disclosure: I am a mentor there.)
One $50,000 investment, access to the 500 Startups incubator program and two $10,000 seed investments from the fine folks at 500 Startups.

► $50,000 & incubation from Band of Angels and Pivotal Labs
A $50,000 investment from BoA and office space, agile and lean development advice, a Pivotal Inception (two day deep dive on product planning) and help hiring from Pivotal Labs.

► $8 000 Recurring Billing Services
Two 12 month plans with Chargify that will allow you to automate billing and payments for up to 200 users plus advice on subscription services from the industry experts behind Chargify

► $10 000 in hosting
Six months of cloud-based hosting for your application up to $10k in resources plus an architectural consultation from EngineYard’s crack team of engineers.

► $1,000 Twilio Voice & SMS Credit
$1k in credit from Twilio for the best usage of SMS in your business.

►Eric’s choice
Winner could come to sllconf 2011 as Eric’s guest,and join us at the VIP Speaker’s Dinner

► Time with our mentors
The ten best posts will get matched to the Lean Startup mentors. They will provide personalized feedback on your business and help the winners any way they can. There are some world-class and well-known talents in this group. (Yep, I am one of those mentors but probably not considered world-class nor well-known.)

What I am attempting to get across to people interested in Lean Startup/Customer Development is two-fold:

1) Don’t miss the forest for the trees by mistaking the tactics currently popular now with the actual principles, as well as, perhaps more importantly, the concepts of “shu, ha, ri” applied to Lean Startups. Bear with me here – I promise you this isn’t bullshit hand-waving territory here.

In the phase of Shu, the person tries to abide by the rules. She tries to learn all the principles and informations by heart. But she can’t abide by all the rules while she is doing the practice. Her body(including her brain) starts to remember them bit by bit through repetitious practices. When the time comes she can internalize and abide by all the rules — when Shu is achieved, Shu phase is finished and she enters into Ha phase.

In the phase of Ha, she tries to break the (old) rules. She tries to self-reflect on herself and her knowledge, and come up with anti-theses such as exceptions of the rules in the real world. But she can’t break all the old rules while she is doing the practice. Her rules start to get more complete(or becomes more like “case-by-case”) as the rules encompass exceptions bit by bit. When the time comes she can break all the rules and see the both sides of every rule (maybe substituting with a set of her own rules) — when Ha is achieved, Ha phase is finished and she enters into Ri phase.

“Ha” is achieved when one tries to go out into the real-world and apply Lean Startups/Customer Development and quickly stumbles and falls. But one gets up and sees some success, often with shins bleeding. Or doesn’t see any success. Only failure. Often the data come back entirely and irritatingly, inconclusive. This is often very, very frustrating because what we talk about in the blogosphere doesn’t match neatly, if at all, with what actually happens in the chaotic real-life in your startup. Getting to Ha is accelerated by events like Lean Startup Machine.

In the phase of Ri, she tries to leave the rules. She tries to get free from all the rules, and get into the state of no distinction, or into a new dimension. But she can’t leave all the rules while she is doing the practice. Her body starts to forget them bit by bit through following natural laws and flows (or Tao). When the time comes she can leave all the rules – when Ri is achieved, Ri phase is finished and she enters into a new dimension of Shu.

At the end of Shu, what she sees is nothing but the rules — everything looks like the rules.

At the end of Ha, what she sees is nothing like the rules.

At the end of Ri, she doesn’t see but work with her mind.

Jason Evanish has a great post detailing what is effectively his Lean Startup journey from Shu to Ha and onto Ri. I have written previously about judo as a Lean Startup metaphor and this fits expands upon that. Contrary to popular belief, earning a black belt does NOT mean one is considered a expert judo player. Earning a black belt indicates one has learned the fundamentals and is now ready to unlearn to forget The Rules.

In judo, that means the difference between throwing someone technically perfectly in a sterile fashion and controlled environment.

The throw above, (morote seoi-nage for those of you keeping track at home) is a picture-perfect of the Platonic ideal of that throw. The throw is executed quickly, without hesitation or flaw.

In the heat of the moment, at the All-Japan judo championships it looks something like this.

Notice how this throw was much less smooth and less elegant, and even a bit jerky and almost off-beat. Not surprising considering the judo player being thrown didn’t want to be thrown. But an experienced judo competitor would tell you, for all of its faults relative to the Platonic ideal, it was no less beautiful because it won the match.

To be an effective judo player on the “real-world” of the tatami mat – one has to adapt specific judo techniques to one’s specific anthropometry – but this can only be done once one has mastered the rules of these techniques. Lean Startup and Customer Development are no different. One has to learn The Rules and specific tactics to really understand that there are no rules.

It is a bit after 9pm here in Boston and both the quantity and quality of validated learning that Lean Startup Machine (Boston) teams have generated is mind-blowing. I am simply in awe. Don’t want to spoil the punchline, but we have had two teams invalidate their startup idea, with pretty strong confidence, in about 1.5 days. Interestingly enough, one team ran into a company that has been at the same idea for 3 years (!) and has been limping along.

Think about the opportunity cost of 3 years. Think about not really knowing for 3 years whether or not your idea has legs —- and then some young punks from LSM Boston crush that idea by getting in front of the major stakeholders and doing a few targeted Customer Development interviews.